Group's reliance on reinsurance counterparties leads to downgraded ratings

Group’s reliance on reinsurance counterparties leads to downgraded ratings | Insurance Business New Zealand

Reinsurance

Group’s reliance on reinsurance counterparties leads to downgraded ratings

Strategy has led to questions relating to risk exposure

Reinsurance

By
Kenneth Araullo

AM Best has revised the long-term issuer credit rating (Long-Term ICR) for A-CAP Group companies following concerns regarding the firm’s management of risks associated with its reinsurance counterparties and its growing dependency on these entities.

The long-term ICR has been adjusted downward to “bbb” from “bbb+,” while the financial strength rating remains steady at B++ (Good). Additionally, AM Best has initiated a review of these ratings with negative implications, signaling potential concerns about the group’s future performance.

AM Best’s review focuses on the adequacy of collateral and the financial stability of its unaffiliated reinsurers in the short term. The group’s strategy of engaging new business with unrated reinsurers has raised questions about its increasing exposure to counterparty risk.

The credit agency pointed out the significant impact of high reinsurance leverage and the deteriorating credit quality of counterparties on A-CAP Group’s capital adequacy. The agency anticipates that A-CAP Group will take steps to mitigate its exposure to reinsurance risk by decreasing its reliance on reinsurance partners.

Despite efforts to secure additional capital to fuel growth, there are concerns that the group may not meet necessary risk-based capital standards if it needs to recapture at-risk business and reintegrate the associated assets on to its balance sheet.

The decision to place A-CAP Group’s ratings under review with negative implications will allow AM Best to assess the group’s 2023 performance, particularly in relation to its ability to manage counterparty risks and enhance capital levels. This evaluation will be based on the group’s statutory financial statements for 2023 and its effectiveness in addressing those concerns.

Despite these challenges, A-CAP Group is expected to report strong operational results, with continued growth in its annuity business as it vies for a larger share of the competitive annuity market. While the group offers some product diversification with life and medical supplement products, its primary focus remains on a range of fixed annuity products.

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